Scottish government falls short on land and buildings transaction tax (LBTT)

When introduced back in 2015, as the first wholly devolved tax set by the Scottish Parliament, the land and buildings transaction tax (LBTT) was heralded as a major step forward by the Scottish government. The idea was to increase taxes on both second homes and more expensive properties to, in theory, keep down the tax associated with smaller valued homes. However, the figures for 2015/16 show a 10% shortfall at just £483 million against expectations of £538 million.

Housing logjam

The LBTT ensured that the first £145,000 of any property purchase price was free of tax, 2% was paid on the next £105,000, 5% on the next £75,000, 10% on the next £425,000 and 12% on anything above that figure. We know from feedback that changes to the taxation system have resulted in something of a logjam in the middle areas with homeowners unwilling/unable to upsize or downsize hence stagnation in the marketplace. Properties valued at or around the change in tax rates have been more acutely impacted by these additional costs adding more woes to the Scottish property market.

The details revealed in a recent budget report confirmed that LBTT raised £214 million in house sales, £93 million on second home sales and £177 million in non-residential property transactions. There was also an additional £149 million from the landfill transaction tax which in itself was 12% higher than the initial £133 million forecast. However, at a time when first-time buyers are struggling, wages are struggling to keep pace with inflation and the cost of maintaining a property continues to rise it did seem a somewhat bizarre moment to totally revamp the property tax system.

While some elements of concern are not necessarily unique to the Scottish housing market, we know that over the last few years the Scottish economy has significantly underperformed the rest of the UK. Thankfully there have been signs of improved performance in the short term and the rising price of oil should at least prompt a partial recovery in areas such as Aberdeen where the property market fell dramatically when the oil price collapsed to under $30 a barrel. A price now approaching $60 a barrel will hopefully entice more oil companies to increase production which will in turn help to improve the local economy.

It is perhaps the spectre of a second independence referendum which is causing most concern to property investors north of the border. Despite confirmation that the last independence referendum would not be repeated for a generation it seems that the Scottish government is looking for the right moment to push for another one. This adds to confusion regarding Scotland’s future in the European Union not to mention the constant flip-flopping about Scotland’s long-term currency. At a time when the UK economy is under pressure and Brexit continues to hover like a dark cloud the Scottish housing market does not need further reasons for concern.

Long-term view

In theory, the idea of revamping the property tax bands is not unreasonable and with no tax on properties valued at less than £145,000 it should at least encourage more first-time buyers in the longer term. Perhaps the greatest concern is the time at which it was introduced although the fact that there is a 10% shortfall on forecast revenues is possibly a reflection of market changes as opposed to errors by the Scottish government. However, few would deny that the timing of the change could have been better?